How A Tech Firm Got Its Diversification Mojo

Few tech companies are multi-directional, capable of doing several things at once. And while the glories of diversification get sung all the time, few companies can really pull that off. Those that can diversify well begin with an original core competency and expand that to the umpteenth power into complementary areas. The well-known diversification champs started small and became giants using that formula.

Think about Amazon. It started out selling books online. Once it had that mastered, the company discovered that it could use its basic skills to delve into all manner of retailing. Today, people can buy almost consumer good they need via Amazon. Or consider Netflix, which excelled at delivering movies to customers. At first, the films were on discs transported by mail. Then it shifted into streaming video, and from there into producing its own content.

Where can you find the next ambidextrous tech firm? One good candidate is American Superconductor, founded in 1987 and headquartered in the Route 128 tech corridor outside of Boston. And it makes very sophisticated gear that carries electricity, the lifeblood of the modern world. So now AMSC, as the firm is known, focuses on electrical grids, wind power and protecting military vessels, meaning it shields warships from mines.

AMSC has learned the hard way about the virtues of a diverse business mix. Its products used to go mainly into Chinese wind turbines, owned by Beijing-based Sinovel. In 2011, AMSC found out, to its horror, that Sinovel was welshing on their deal because it had pirated the U.S. supplier’s technology, and no longer required AMSC’s services.

The American company took Sinovel to court for stealing trade secrets and ended up with a judgment in excess of $800 million. AMSC had more than 70% of its business with Sinovel. “We’re never going to be caught that way again,” said CEO Daniel McGahn in an interview.

Judging from its filing for the first three quarters of the current fiscal year, the wind segment is 44% of revenue. The goal is making both offshore and land wind power generation operate more cheaply and efficiently. AMSC has an international presence, with clients in countries like South Korea and Japan.

The larger part of the business, at 56% of revenue, is the electrical grid operation, led by a new process that better insulates power systems from natural and manmade disasters. By manmade, read hostile nations or terrorists trying to screw up the power supply. The idea, in McGahn’s words, is to “harden the grid.”

At present, if a substation goes down, an entire area is blacked out until it can be restored. “Right now, the grid is segmented, and their problems are compartmentalized,” McGahn said. AMSC’s approach is to integrate the grid the way the Internet is. “There’s 100% redundancy, so for something wrong at one substation, it’s like stringing an extension cord” from elsewhere in the system. Last year, AMSC struck a pact to install its wares in the Chicago area.

The newest venture for AMSC is the ship protection initiative. Before, the Navy looped heavy copper wire around its hulls to ward off detection by enemy mines. The new naval vessels, however, are faster and operate in shallower water than in the past. That spells greater danger from demolitions. AMSC’s wire does a better job of reducing a ship’s magnetic signature and weighs some 20% of what the copper wire did.

The stock has done well. Over the past three years, the share price has risen by more than a third. And AMCS is cheap, at 9.6 times trailing earnings. With a solid cash stash of $80 million, doubling from the year before, the company is in a solid position. As McGahn told analysts during the most recent earnings call, “we have multiple pathways to growth and we have the ability here to be able to support that growth.”